REPORTABLE

[WESTERN CAPE HIGH COURT, CAPE TOWN]

In the matter between:

THE COMMISSIONER FOR THE

SOUTH AFRICAN REVENUE SERVICE

and

MARK BRADLEY BEGINSEL N.O.

ALLAN McKINLEY RENNIE N.O.

MAKHUBA LOGISTICS (PTY) LTD

(UNDER SUPERVISION)

THE CREDITORS OF MAKHUBU

LOGISTICS (PTY) LTD

Case No: 15080/12

Applicant

First Respondent

Second Respondent

Third Respondent

Fourth Respondent

JUDGMENT DELIVERED: 31 OCTOBER 2012

2

FOURIE,J:

INTRODUCTION

[ 1] The Companies Act 71 of 2008 ("the Act") which came into operation on

1 May 20 I I, has introduced several new concepts to the South African

corporate landscape, including business rescue provisions which are dealt with

in Chapter 6 of the Act. One of the declared purposes of the Act, is to provide

for the efficient rescue and recovery of financially distressed companies in a

manner that balances the rights and interests of all relevant stakeholders (section

7 (k)).

[2] On a practical level, Chapter 6 caters for proceedings to facilitate the

rehabilitation of a company that is financially distressed, by providing, inter

alia, for the temporary supervision and management of the company and its

affairs, whilst imposing a temporary moratorium on the rights of creditors to

enforce their claims against the company. At the heart of business rescue

proceedings, is the preparation of a business rescue plan by a business rescue

practitioner for consideration and possible adoption by the relevant

stakeholders. This plan should set the course for rescuing the company by

achieving the goals set out in section 128 ( 1) (b) of the Act.

3

[3] In the present matter the validity of a decision taken at a meeting of

creditors of a company in financial distress, to adopt a business rescue plan, is

challenged. Further, the court is called upon to consider whether the business

rescue proceedings should continue, or be tenninated by ordering the business

rescue practitioners to apply for an order discontinuing same and placing the

company in liquidation.

THE FACTUAL BACKGROUND

[ 4] The background facts are largely common cause.

[5] Third respondent ("'the company") conducts the business of road

transport, in particular transport of fuel. During 201 1, the company experienced

financial difficulties and was unable to pay its debts as and when they fell due.

This resulted in creditors taking legal action against the company and on 26 July

2011, an order was made by the South Gauteng High Court placing the

company under provisional liquidation.

[ 6] On 14 October 2011 , pursuant to an application by three shareholders of

the company, who together own 95% of its shares, this court ordered that the

company be placed under supervision and that ·business rescue proceedings

4

commence, as contemplated in the Act. First and second respondents ("the

BRPs") were appointed as business rescue practitioners to conduct the business

of the company with all powers and duties entrusted to them in terms of the Act.

[7] The primary objective of the business rescue proceedings, stated in the

application, was to restore the company to solvency and to rescue the business

as a going concern. It was not anticipated, at that juncture, that the second aim

highlighted in section 128 ( l ) (b) (iii) of the Act, namely to implement a

business rescue plan that would result in a better return for the company's

creditors or shareholders than would result from the immediate liquidation

thereof, would have to be pursued, although it was recognised as a possibility.

[8] At the first meeting of creditors of the company it was resolved that the

BRPs should take the necessary steps to prepare and publish a business rescue

plan for the company. At that stage applicant ("SARS") had provided the BRPs

with proof of the company's indebtedness to it, which then amounted to

Rll 194 677-39, for outstanding value added tax, employees' tax, skills

development levy, unemployment insurance . contributions, penalties and

interest. Subsequent thereto the BRPs made several unsuccessful attempts to

reach a compromise with SARS. At all material times during these negotiations,

5

the BRPs were of the view that SARS is a preferent creditor in the business

rescue proceedings.

[9] Thereafter several infonnal meetings of creditors were held and the BRPs

brought applications to court for the extension of the period within which to file

the business rescue plan. During this period, the BRPs initially reported that the

company was experiencing a continuing increase in turnover and that it was

trading on the basis that it was breaking even, even making a small profit. The

prospects to improve profitability without having to sell or encumber the

substantial free assets of the company, remained good.

[10] However, at subsequent meetings of creditors held during March and

April 2012, the BRPs advised the creditors that, mainly as a consequence of the

commg into operation of Transnet's new multi-product pipeline between

Durban and Johannesburg during January 20.12, which was earlier than

anticipated, the company was experiencing problems in securing work and that

it had suffered a loss of approximately R300 000-00 in February 2012. Later the

creditors were informed that the company's estimated loss in March 2012

amounted to R2,9 million, mainly due to a significant dec! ine in the volumes of

fuel to be transported. A fUI1her extension for the publication of the business

6

rescue plan was applied for and granted and eventually the proposed business

rescue plan was circulated under cover of a letter dated 18 June 2012.

[ 11] The proposed business rescue plan informed interested parties of the

following:

(a) The unexpected openmg of the Transnet oil pipeline, earlier than

anticipated, had a significant adverse effect on the company's trading

operations, resulting in a reduction in the company's turnover in excess of

Rl ,5 million per month and a corresponding loss of profitability. As it

had not been possible to replace the lost business or restore the trading

operations of the business to profitability, there was no prospect of

turning around the company's fortunes in the short to medium term. Thus

the business operations of the company should be wound down to avoid

further losses.

(b)As a result of the changed circumstances of the company, it had not been

possible to obtain a purchaser for the entire business of the company as a

going concern, or to present a business rescue plan which would trade the

company out of its difficulties. The company would accordingly cease

trading on 31 July 2012.

7

(c) If the company is liquidated, the sale of its assets would yield

·-R23 413 400.91 for distribution and the secured and preferent creditors

would receive dividends, but concurrent creditors would receive no

dividend. However, if the proposed business rescue plan is adopted, the

sale of three parts of its operations, as well as the sale of its assets through

releasing them into the market in a controlled manner until the end of

2012, and thereafter by placing them on public auction without reserve,

would yield R34 266 552. 60. In such event, the concurrent creditors

would receive an initial dividend of 2c/R and a final dividend of 13c/R.

(d)The BRPs expressed the view that, having taken legal advice, SARS is

not a preferred creditor in terms of business rescue proceedings. SARS

was consequently reflected as a concurrent creditor in the annexures to

the business rescue plan, SARS' claim being valued at R12 392 706. 26.

It is further apparent from the business rescue plan that, if the

distributions it envisaged were made, SARS would not enjoy preference

over any of the other creditors- in this regard the business rescue plan

states that claims would be made in the ··usual order of preference ", ie

payment of any secured claims, followed by preferent claims of

employees in agreed amounts and thereafter payment of the concurrent

claims, as contemplated in section 150 (2) (b) (v) of the Act.

8

[12] In a subsequent letter to the BRPs, SARS insisted that it should be ranked

as a preferent creditor and that, consequently, the meeting of creditors

scheduled for 17 July 2012, should be postponed so that the BRPs could submit

a revised business rescue plan for consideration by all affected parties, taking

into account the attitude of SARS regarding its status as a preferent creditor.

[13] In a letter dated 16 July 2012, the BRPs refused this request for a

postponement of the meeting of creditors and informed SARS that they had

taken senior counsel's advice, to the effect that the classification of creditors in

the Insolvency Act 24 of 1936 ("the Insolvency Act"), was not applicable to

Chapter 6 of the Act, which contains no statutory preferences such as are to be

found in sections 96-1 02 of the Insolvency Act. The BRPs added that,

irrespective of whether SARS was a preferent or concurrent creditor, it did not

impact on SARS' voting on the proposed business rescue plan and that the

implementation of the plan should not be interrupted.

[14] At the creditors' meeting of 17 July 2012, sixteen creditors, having

claims in aggregate amounting to Rl 02 391 092. 41 , were present. There were

no secured creditors, as the only secured claims were a number of repairers'

liens, for the payment of which security had been posted. SARS, with a claim of

9

R1 2 392 706. 26, voted against the adoption of the business rescue plan, while

UTATU, whose claim amounted to R484 279. 44, abstained from voting. The

remaining fourteen concurrent creditors, with claims in aggregate amounting to

R89 514 106. 71, voted in favour of the adoption of the business rescue plan.

This translated into 8 7% of creditors' voting interests in favour of the adoption

of the proposed business rescue plan, 12o/o against and 1 o/o abstaining.

THE RELIEF SOUGHT

[15] On 2 August 2012, SARS applied urgently for the following substantive

relief:

(a) An order declaring unlawful and invalid the decision taken at the meeting

of creditors of the company held on 17 July 2012, to approve the business

rescue plan of the company proposed by the BRPs.

(b) An order interdicting the BRPs from ·distributing any momes of the

company pursuant to the business rescue plan.

(c) An order declaring that the BRPs are obli~ed to take the steps as specified

in section 141 (2) (a) (i) and (ii) of the Act, viz to apply to court for an

order discontinuing the business rescue proceedings and placing the

company in liquidation.

10

[16] The court, by agreement between SARS and the BRPs, issued a rule nisi

calling upon respondents to show cause, if any, why the relief sought by SARS

should not be granted. The order also included certain interim relief which

would operate pending the final determination of the matter. The relief sought is

opposed by the BRPs.

THE ADOPTION OF THE BUSINESS RESCUE PLAN

[17] SARS, firstly, claims that, on the strength of its interpretation of the

provisions of section 145 ( 4) (a) and (b) of the Act, the decision taken to adopt

the business rescue plan is unlawful and invalid. This section reads as follows:

"(4) In respect of any decision contemplated in this Chapter that requires the

support of the holders ~lcreditors ' voting interests-

(a) a secured or unsecured creditor has a voting interest equal to the

value of the amount owed to that cred,itor by the company; and

(b)a concurrent creditor who would be subordinated in a liquidation has

a voting interest. as independently and expertly appraised and valued

at the request of the practitioner, equal to the amount, if any, that the

creditor could reasonably expect to receive in such a liquidation of the

company."

[18] SARS accepts that Chapter 6 of the Act does not oblige the BRPs to

propose a business rescue plan which confers on SARS a preference upon the

11

distribution of the free residue over the other unsecured creditors. However,

SARS submits that Chapter 6 of the Act also does not oblige the BRPs to treat

SARS as a concurrent creditor. In this regard, SARS contends that section 150

(2) (b) (v) of the Act permits a business rescue plan to create and specify the

order of preference in which the proceeds of property ""ill be applied to pay

creditors if the business rescue plan is adopted, subject to the preferences

conferred by section 135 of the Act on · the different classes of post­

commencement finance creditors, described in that section. Therefore, SARS

contends, there is no reason why it could not have been specified as a preferent

creditor. In such event, SARS says, it would obviously have voted for the

business rescue plan as its interests would have remained protected.

[ 19] SARS further maintains that its status as a preferent creditor under

section 99 of the Insolvency Act, has an important implication for the voting on

a business rescue plan. It contends that, because SARS is a preferent creditor

whose claim ranks ahead of ordinary concurrent creditors under section 103 (1)

(a) of the Insolvency Act, it is an unsecured creditor referred to in section 145

(4) (a) of the Act and as such had a voting interest at the creditors' meeting on

17 July 2012, equal to the value of its claim against the company. SARS also

contends that ordinary concurrent creditors under section I 03 ( 1) (a) of the

Insolvency Act, are included in the class of concurrent creditors who would be

12

subordinated in a liquidation, referred to in section 145 ( 4) (b) of the Act, and

because they would receive nothing on liquidation of the company in the instant

matter, they had no voting interest at the meeting of 17 July 2012.

[20] In sum, SARS contends that, by treating its voting power as the same as

that of the concurrent creditors, who would get nothing if the company was

liquidated, despite section 145 (4) of the Act, and by ranking its claim as the

same as those of the concurrent creditors, despite the possibility of giving it

preference under section 150 (2) (b) (v) ofthe'Act, the business rescue plan was

adopted and facilitates what amounts to a liquidation of the company, in which

SARS is deprived, against its wi11, of the statutory preference to which it is

entitled when companies are liquidated. In the result, SARS concludes, that the

adoption of the business rescue plan by the creditors on 1 7 July 20 12, was

unlawful and invalid.

[21] Simply put, the issue to be determined is whether or not SARS is to be

treated as a preferent creditor in business rescue proceedings. As appears from

the above, SARS contends that all preferent creditors, as contemplated by

sections 96 to 102 of the Insolvency Act, are to be categorised as unsecured

creditors under section 145 ( 4) (a) of the Act, while all other concurrent

13

creditors, as envisaged by section 1 03 of th~ Insolvency Act, are concurrent

creditors who would be subordinated on liquidation, as envisaged by section

145 (4) (b) of the Act. This would mean that, at the meeting of creditors held on

17 July 2012, SARS, as a "preferent" unsecured creditor under section 145 (4)

(a) of the Act, would have had a voting interest equal to the value of its claim

against the company. On the other hand, the remainder of the ("non-preferent")

concurrent creditors, representing 87% of the value of all creditors present at the

meeting, would have been disenfranchised concurrent creditors in terms of

section 145 ( 4) (b). In such event, the vote of SARS would have carried the day

and the business rescue plan would have been rejected, contrary to the wishes of

the lion's share of the company's creditors.

[22] In my view, SARS' construction of the provisions of section 145 (4) of

the Act, is not only contrary to the ordinary grammatical meaning of the words

used in the said section, but also leads to an illogical result that fails to balance

the rights and interests of all relevant stakeholders, as envisaged in section 7 (k)

ofthe Act.

[23] The business rescue provisions contained in Chapter 6 of the Act, do

provide for certain preferences in respect of claims of creditors. Thus, section

14

135 of the Act, creates preferent claims m respect of post-commencement

finance obtained by the company and specifies the ranking of such claims. Also,

with regard to the rights of employees of the company, section 144 (2) of the

Act stipulates that, to the extent that any remuneration relating to employment

became due and payable by a company to an employee at any time before the

beginning ofthe company's business rescue p~oceedings, and had not been paid

to that employee immediately before the beginning of those proceedings, the

employee is a "preferred unsecured creditor" of the company for the purposes

of Chapter 6.

[24] However, no statutory preferences are created in Chapter 6 of the Act,

such as are contained in sections 96 to 102 of the Insolvency Act. I would have

expected that, if it were the intention of the legislature to confer a preference on

SARS in business rescue proceedings, it would have made such intention clear.

This could easily have been done, but no trace of such an intention on the part

ofthe legislature is found in the Act. In my view, the language of the aforesaid

provisions of the Act, read in context, and having regard to the purpose of

business rescue proceedings, justifies only one conclusion, namely that SARS is

not, by virtue of its preferent status conferred by section 99 of the Insolvency

Act, a preferent creditor for purposes of business rescue proceedings under the

Act.

15

[25] In my opinion, the wording of section 145 ( 4) is clear and unambiguous

and leaves no room for the artificial and strained interpretation that SARS

wishes to place on it. Section 145 (4) (a) refers to secured or unsecured creditors

who have a voting interest equal to the value of the amount owed to them by the

company. This categorisation of creditors is uncontentious and well-known in

legal parlance. Secured creditors are tho.se who hold security over the

company's property, such as a lien or mortgage bond. Unsecured creditors are

those whose claims are not secured, including concurrent creditors. The

unsecured creditors are either preferent or concurrent creditors. The term

"preferent creditor", used in the wide sense, refers to any creditor who has a

right to receive payment before other creditors. To this extent, a secured creditor

also qualifies as a preferent creditor. However, the tenn "pr~ferent creditor" is

normally reserved for a creditor whose claim is not secured, but who

nevertheless ranks above the claims of concurrent creditors (whose claims are

also unsecured). Such preferent creditors are commonly referred to as

"unsecured preferent creditors " and are mentioned in sections 96-102 of the

Insolvency Act.

See Bertelsmann et al, Mars, The Law of Insolvency in South Africa, 9th

edition at 434 and Henochsberg on the Companies Act 71 of 2008, Volume I,

page 508.

16

[26] It follows from the aforesaid, that our insolvency law in practice

recognises unsecured creditors as compnsmg, inter alia, unsecured preferent

creditors and unsecured non-preferent, or concurrent, creditors. There is,

accordingly, no reason to interpret the phrase "unsecured creditor" in section

145 (4) (a), as including only unsecured preferent creditors, but not unsecured

non-preferent, or concurrent, creditors. Such an interpretation is clearly contrary

to the ordinary meaning of the phrase "unsecured creditor", which, according

to its ordinary meaning, includes all concurrent creditors, whether preferent or

non-preferent.

[27] As submitted on behalf of the BRPs, the term "unsecured creditor",

should be read as including non-preferent concurrent creditors, since the

legislature must be assumed to have intended the term to bear its ordinary

meaning in circumstances where there· i"s no indication at all in the Act that a

different meaning is to be assigned to it.

[28] It is to be noted that Henochsberg supra at 508, cvfvances the same

interpretation as SARS. However, at 509, Henochsberg readily concedes that

this interpretation is grossly unfair to concurrent creditors who may be deprived

of their voting rights in this way, especi(:llly as they have more of an interest in

17

the company being rescued than secured creditors, as the latter still have their

security to fall back on should the company eventually be wound up.

[29] The interpretation contended for by Henochsberg and SARS, requires the

phrase, "a concurrent creditor who would be subordinated in a liquidation ... "

in section 145 (4) (b) of the Act, to be a reference to all concurrent creditors, as

their claims would upon liquidation be subordinate to the payment of all the

other claims. Henochsberg, at 508, concedes that, in South African insolvency

law, one does not normally refer to concurrent creditors' claims being

subordinated in a liquidation. As mentioned earlier, Henochsberg also accepts

that the interpretation contended for, is grossly unfair to the concurrent creditors

who would often be deprived of their voting rights in business rescue

proceedings.

[30] I am in agreement with the submission on behalf of the BRPs, that the

reference in section 145 ( 4) (b), to a concurrent creditor "who would be

subordinated in a liquidation ", does not attach to all concurrent creditors, but

only to those concurrent creditors who have subordinated their claims in a

liquidation in terms of a subordination or back-ranking agreement. This is the

ordinary meaning of the concept of subordination, which is similarly

18

uncontentious and well-known in South African law, and, in particular, in our

insolvency law.

(31] The general effect of a subordination agreement is that a subordinated

debt against the debtor, may only be enforced if the debtor is solvent and after

payment of its debts to other creditors. The enforceability of the subordinate

creditor's claim against the debtor, is subject to the condition that it may only be

enforced when the value of the debtor's assets exceeds" its liabilities, excluding

the subordinated debt. The debt will not nonnally survive the debtor's

insolvency.

See Ex Parte De Villiers and Another NNO: In Re Carbon Developments

1993 (1) SA 493 (A) at 504 F-505C.

[32] I agree with the submission made on behalf of the BRPs, that, on the

plain wording of section 145 ( 4) (b) of the Act, the intention was to refer to a

particular category of concurrent creditors, namely, those who have agreed that

their claims can only be enforced if and when the value of the company's assets

exceeds its liabilities. There certainly is a discernible logic to provide for a

mechanism whereby such back-ranked claims should not enjoy the same weight

as the claims of other creditors in business rescue proceedings. Conversely, it

19

seems wholly inconsistent for the purpose and scheme of the Act, to include all

concurrent creditors under section 145 ( 4) ·(b) of the Act, thereby almost

certainly having their voting interest reduced, and quite possibly entirely

emasculated.

[33] Finally, in regard to the interpretation of section 145 ( 4 ), I should mention

that Henochsberg at 508 seems to rely on section 144 (2) of the Act as

justification for its interpretation of section 145 ( 4 ). The following is said:

'(Since Chapter 6 uses the term 'preferred unsecured creditor' to denote an

unsecured claim that is to receive preferential treatment (see eg section 144 (2)

where employees who huve claims against the companJ · for amounts owing

prior to the commencement of the business rescue proceedings, are class~fied as

being 'preferred unsecured creditors' of the company). subsection 4 (a) could

have been stated more clearly hy using the same terminology. Perhaps this was

just an oversight by the legislature, as clearly the subsection is only intended to

cover preferred unsecured creditors · ".

[34] In my view, section 144 (2) of the Act does not lend any support to the

interpretation contended for by Henochsberg. What this section does, is to

expressly single out employees as preferred unsecured creditors of the

20

company, m contradistinction to section 145 ( 4) (a), where, on the plain

wording of the section, the legislature only intended to cover unsecured

creditors and not prefen-ed unsecured creditors. This clear language can

certainly not be overlooked, as suggested by Henochsberg, as being an

oversight by the legislature. The fact of the matter is that. in section 144 (2),

employees are expressly classified as preferred unsecured creditors, whereas

there is no provision in the Act which suggests that SARS is to be regarded as a

preferred unsecure creditor for business rescue purposes.

[35] In the result, I conclude that, in terms of section 145 ( 4) of the Act, each 1

concurrent creditor, save for the category of concurrent creditors who would be

subordinated in a liquidation by virtue of a prior existing subordination

agreement, has a voting interest equal to the value of the amount owed to that

creditor by the company. Therefore, in my view, SARS would enjoy no greater

voting interest than the other concurrent creditors of the company, with the

result that there is no basis upon which to impeach the voting procedure

followed in the adoption of the business rescue plan.

21

THE CONTENT OF THE BUSINESS RESCUE PLAN

[36] In its quest for an order declaring unlawful and invalid the decision taken

at the meeting of creditors held on 17 July 2012, to approve and adopt the

relevant business rescue plan, SARS has added a second string to its bow. In

this regard, SARS argues that the content .of the proposed business rescue plan

did not comply with certain requirements prescribed by section 150 of the Act.

Therefore, SARS contends, the decision to adopt the business rescue plan is

invalid and unlawful.

[37] Section 150 (2) of the Act, provides-that a proposed business rescue plan

must contain all the information reasonably required to facilitate affected

persons in deciding whether or not to accept or reject the plan. To this end, the

section details certain background information, proposals, assumptions and

conditions which the business rescue plan should contain. SARS argues that the

requirements of section 150 (2) of the Act are peremptory, requiring exact

compliance therewith, failing which, the adoption of the plan is rendered invalid

and a nullity. Alternatively, SARS submits that, if substantial compliance with

the requirements of section 150 (2) is permissible, there was not substantial

compliance either.

22

[38] A perusal of section 150 (2) of the Act shows that the legislature has

prescribed the content of a proposed business rescue plan in general terms. The

content can, by its very nature, not be exactly and precisely circumscribed, as it

would differ from case to case, depending on the peculiar circumstances in

which the distressed company finds itself It follows, in my view, that, upon a

proper construction of section I 50 (2), substantial compliance with ·the

requirements of the section will suffice. This would, in my view, mean that,

where sufficient information, along the lines envisaged by section 150 (2), has

been provided to enable interested parties to take an informed decision in

considering whether a proposed business rescue plan should be adopted or

rejected, there would have been substantial compliance.

[39] As mentioned previously, SARS · contends that there has not been

substantial compliance with the requirements of section 150 (2) of the Act.

Firstly, I believe that, in the instant case, the proof of the pudding is in the

eating. The proposed business rescue plan was circulated to all interested parties

and no objection was raised that the content thereof is inadequate to enable the

parties to arrive at an informed decision. At the meeting of creditors held on 17

July 2012, no objection to the content of the plan was forthcoming and 99% of

the interested parties present, including SARS, cast their votes without any

complaint regarding the sufficiency of the proposed plan. Surely, those best

23

placed to judge the adequacy or not of the proposed business rescue plan, are

the creditors who attended the meeting as interested parties and voted for or

against the adoption of the plan. In these circumstances, the belated objection to

the content of the business rescue plan, rings hollow.

[40] I do, however, proceed to deal briefly with the grounds of the objection

raised by SARS. In so doing, 1 refer to the specific provisions of section 150 (2)

of the Act, upon which SARS relies:

Section 150 (2) (a) (ii)

[ 41] SARS contends that, despite the requirement in this sub-section that there

be an indication as to which creditors would qualify as secured, statutory

preferent and concurrent in terms of the law of insolvency, annexures F I - F3 to

the plan do not contain this information. Whilst it is so that the said annexures

do not specifically identifY the creditors falling in the different categories in

terms of the laws of insolvency, annexures D and E to the business rescue plan,

set out the essence required by the interested creditors, based on the known

claims of creditors at the commencement of the business rescue proceedings.

24

[ 42] Annexure D shows that, on liquidation, concun-ent creditors would

receive nothing while SARS and the Workmen' s Compensation Commissioner

would receive the ful1 free residue. As mentioned earlier, secured creditors

would not come into play as security had been posted for their claims.

[43] Annexure E shows that, on implementation of the business rescue plan,

concurrent creditors would receive 15c/R and preferred employee creditors

would be paid in ful l. Based on this information, SARS voted against the plan,

while the other concurrent creditors, except for one abstention, voted in favour.

It accordingly seems to me that, although the detail regarding the identity of the

creditors referred to in this sub-section of the Act, may not have been provided,

there has been substantial compliance, in the sense that the information

provided in the annexures, read with the plan, enabled the interested creditors to

decide whether to accept or rej ect the business rescue plan.

Section 150 (2) (c) (iv) (aa) and (bb)

[44] SARS complains that a projected balance sheet and statement of income

and expenses for the ensuing three years, as required by these sub-sections,

were not included in the proposed business rescue plan.

25

[ 45] The short answer to this complaint is that, where the business rescue plan

does not contemplate the continuation of the business of the company as a

whole, these requirements are neither necessary nor possible. ln fact, as

submitted on behalf of the BRPs, to insist upon these requirements would, in the

circumstances, be manifestly absurd. In any event, the business rescue plan,

read with the annexures thereto, indicates with sufficient particularity the BRPs'

estimates, based on known facts, as to the likely benefit to all affected parties if

the plan is implemented.

Section 150 (2) (b) (vi)

[ 46] This sub-section provides that the proposed business rescue plan must

include the benefits of adopting the business rescue plan as opposed to the

benefits that would be received by creditors if the company were to be placed in

liquidation. SARS contends that, in furnishing information in the plan

comparing the situation under business rescue with that which would prevail on

liquidation, the BRPs were obliged to postulate a liquidation date as at the date

of the business rescue plan, ie June 20 12. As the proposed business rescue plan

compares the situation under business rescue with that which would have

prevailed on liquidation at the date of the commencement of business rescue

proceedings, ie October 201 1, SARS argues that the plan contains a material

26

misrepresentation precluding the creditors from properly companng the

business rescue scenario with the liquidation scenario.

[47] The BRPs maintain that there is no merit in this submission of SARS and

that they were in no way remiss in reflecting the liquidation position in

Annexure D to the business rescue plan, as at the commencement of business

rescue, ie in October 201 1. In fact, the BRPs argue, this is the only date at

which the Act contemplates that this can be done. They refer to section 150 (2)

(a) (iii) of the Act, which states that. the business rescue plan, as part of the

background, must include information concerning the probable dividend that

would be received by creditors in their specific classes, if the company were to

be placed in liquidation. This, the BRPs' submit, must be read in conjunction

with section 150 (2) (a) (ii) which makes it clear that the specific classes of

creditors on liquidation, are those which are extant "when the business rescue

proceedings began''.

[ 48] It seems to me that the BRPs ar~ correct in their submission. Section 150

(2) (a) (ii) and (iii) appears to be dispositive of the question of the comparison

date. It has to be the former date, namely when the business rescue proceedings

began.

27

[49] The BRPs also point out that, in terms of section 13 1 (6) of the Act, the

order granted by this court on 14 October 201 1, was to suspend liquidation

proceedings. If the business rescue proceedings were to end by the conversion

to a liquidation, in accordance with section 132 (2) (a) (ii), the winding-up of

the company would be revived on the application of the BRPs in accordance

with section 141 (2) (a) (ii) of the Act. The commencement ofthe winding-up

would have to be a date prior to 14 October 201 1, as the company was already

in liquidation at that date. I therefore agree that there is no substance in the

contention by SARS that a liquidation date in June 2012 should be postulated.

[50] I accordingly find that there is no merit in the submission that the

business rescue plan is invalid and unlawful due to the alleged non-compliance

with the requirements of section 150 of the Act.

SHOULD BUSINESS RESCUE PROCEEDINGS CONTINUE?

[51] As indicated earlier, SARS also seeks a declarator to the effect that the

BRPs are obliged to apply to court in terms of section 141 (2) (a) (i) and (ii) of

the Act, for an order discontinuing the business rescue proceedings and placing

the company in liquidation. The section reads as fo llows:

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"(2) If, at any time during business rescue proceedings, the practitioner

concludes that-

(a) There is no reasonable prospect for the company to be rescued, the

practitioner must-

(l) so inform the court, the company and all affected persons in the

prescribed manner; and

(ii) apply to the court for an order discontinuing the business

rescue proceedings and placing the company into liquidation. "

I should add that section 141 (3) of the Act provides that the court to which this

application is made, may make the order applied for, or any other order that the

court considers appropriate in the circumstances.

[52] As explained earlier, the initial prognosis was that the company would

continue to be run as a going concern and managed to financial soundness.

However, subsequent events had an adverse effect on the company's operations

and profitability, which resulted in the decision to wind the company down to

avoid further losses. In the result~ the proposed business rescue plan included

the recommendation that the company cease trading on 31 July 2012, and in

essence provided that thereafter it be liquidated and its affairs be wound up by

the BRPs.

[53] The question posed by section 141 (2) (a) of the Act, is whether or not

there is a reasonable prospect for the company to be rescued. Section 128 ( 1) (h)

29

of the Act defines the expression "rescuing the company·· in Chapter 6 of the

Act, as meaning achieving the goals set out in the definition of ''business

rescue" in section 128(1) (b). The third of those goals, set out in section 128 (1)

(b) (iii), is the following:

"the development and implementation. tf approved, of a plan to rescue the

company by restructuring its affairs. business, property. debt and other

liabilities, and equity in a manner that maximises the likelihood of the company

continuing in existence on a solvent basis or, if it is not possible for the

company to so continue in existence, results in a better return for the company's

creditors or shareholders than would result from the immediate liquidation of

the company. "

[54] As it is not possible for the instant company to continue in existence on a

solvent basis, the question, for purposes of the implementation of section 141

(2) (a) of the Act, is whether the business rescue plan which has been adopted

by the creditors, would, if implemented, result in a better return for the

company's creditors than would result from the immediate liquidation of the

company.

[55] At the outset I raised the question whether a court is entitled, in

circumstances where the BRPs have concluded that the implementation of the

business rescue plan, as adopted by the creditors, would result in a better return

30

for the company's creditors, to override such conclusion by granting the

declarator sought by SARS.

[56] As I understood the submission on behalf of SARS, the court has this

power as the overseer of the business rescue proceedings which it has

authorised, particularly in circumstances where the BRPs (according to SARS),

have committed a material mistake in failing to conclude that the

implementation of the business rescue plan would not result in a better return, as

envisaged by section 128 (1) (b) (iii) of the Act.

[57] In view of the conclusion that I have reached on the factual question,

whether or not the business rescue plan would result in a better return for the

company's creditors than the immediate liquidation of the company, it is not

necessary for me to prolong the debate on whether the court, in the present

circumstances, has the power to intervene in terms of section 141 (2) of the Act.

I accordingly accept, without deciding, that the court has the power to intervene

where it is shown that the BRPs have committed a material mistake in

concluding that the continued implementation of the bu8iness rescue plan would

result in a better return for the creditors of the company, as envisaged in section

128 (1) (b) (iii) of the Act.

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[58] In argument, SARS and the BRPs were basically in agreement that "a

better return" means that there is more money overall to be distributed to

creditors, with the result that they would receive a greater distribution than

would be the case in a liquidation. Whilst agreeing on the test to be applied, the

parties differed materially on the application thereof to the facts of this matter.

SARS, through its expert witness, Mr. Pfaff, took the view that there is no

material difference in the return the assets of the company will generate after

statutory costs have been deducted, between the business rescue option and the

liquidation process. The BRPs, on the other hand, were of the view that there

would be a definite duplication of costs in the event of a liquidation, with the

result that the continued implementation of the business rescue plan would yield

significantly more than would be achieved if the company was placed in

liquidation. SARS, in an alternative submission, suggested that the court should

even consider referring the dispute of fact in this regard for the hearing of oral

evidence.

[59] On reflection, I do not believe that it is necessary to conduct a detailed

analysis of the evidence produced by the respective parties in support of their

opposing views. It appears to me that, in deciding this issue, a practical common

sense approach is called for. It is clearly not possible to arrive at an exact

iinancial calculation in comparing the two scenarios. Therefore, little will be

32

achieved by referring the dispute to oral evidence, which will result in a further

waste of time and money, to the detriment of the creditors of the company.

[60] I am further of the view that, in deciding this issue, one should not lose

sight of the events as they have unfolded since October 2011. This is a case

where business rescue was accepted as a viable prospect at the time of the

granting of the order placing the company under supervision. After the granting

of the order on 14 October 2011, the BRPs took control of the business and

succeeded in reducing the company's trading losses. It was only as a result of

the unexpected opening of the Transnet oil pipeline earlier than anticipated, that

the termination of the company's business became inevitable. This is not a case

where a liquidation was from the outset disguised as a business rescue.

[61] Moreover, the implementation of the business rescue plan is far­

advanced. It is not disputed that the prices obtained by the BRPs for assets

already sold pursuant to the business rescue plan, have exceeded expectations.

Planning for the sale of three parts of the company's operations, as well as the

sale of its assets through releasing them into the market in a controlled manner,

and thereafter by placing them on public auction without reserve, has begun.

Also, as part of the background circumstances, I should reiterate that the

business rescue plan and its implementation was supported by 87% of the value

33

of creditors present at the meeting of l 7 July 2012. It is only SARS who takes

the opposite view.

[62] I accordingly incline to the view that, in practical terms, nothing will be

achieved if the business rescue proceedings are now to be converted into a

liquidation. On the contrary, it appears to me to be inevitable that, by placing

the company in liquidation, all that will be achieved is to add the costs of

liquidation to those already incurred in the business rescue proceedings.

[63] If the business rescue proceedings are now tenninated, the liquidation

process will have to be re-introduced in terms of section 131 (6) of the Act. This

would entail, inter alia, the appointment of liquidators, the proof of claims by

some two hundred creditors, meetings of creditors and the preparation of a

liquidation and distribution account. All of this wi ll take time and result in the

incurring of additional costs. It appears to me that this will not only cause the

payment of the claims of the company's creditors to be delayed, but due to the

increased costs, their return will be reduced. Put differently, I am satisfied that

the continuation of the business rescue proceedings wi11 result in a better return

for the company's creditors as a whole, than would result from the re­

introduction of the liquidation process.

34

[64] In my opinion, there is no practical reason for the conversiOn of the

business rescue proceedings to liquidation. It seems to me that, on a conspectus

of the evidence as a whole, there is much to be said for the BRPs' contention,

that the only purpose of converting this business rescue to liquidation, would be

to ensure that SARS is treated as a preferent creditor.

[65] I therefore find that the BRPs should not be ordered to take the steps

specified in section 141 (2) (a) (i) and (ii) ofthe Act.

CONCLUSION

[66 ] In the premises, the application falls to be dismissed. The BRPs as the

successful parties are entitled to their costs. I am satisfied that the employment

of two counsel was justified.

[67] In the result, the rule nisi issued on 3 August 2012, is discharged and the

application is dismissed with costs, including the costs consequent upon the

employment of two counsel.